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When considering many of the inventions that we
use regularly, the
credit card
is a relatively new idea; the first credit card
that could be used at more than one merchant was
issued in 1950. Frank McNamara started the
“Diner's Club” credit card company with about 200
card holders, and it was also the start of the
vicious cycle many credit card users fall victim
to: charging purchases when you don't have the
cash to buy them, and then struggling to keep up
with the monthly payments because of high interest rates
and spending outside of your means.
The average credit card debt held by the typical
American is over $8500. As any credit card holder
knows, the interest on a credit card causes you to
pay more than double the amount you've spent on
the card, if you only send the minimum payment
and never make any late payments. That number
increases when you are late sending payments,
thanks to the addition of “late fees”.
Some people attempt to play “credit roulette” to
pay down their credit. This is a game where you
take out a loan to pay off a credit card, or you
transfer credit card debt from one card to
another, hoping to take advantage of a lower
interest rate
or promotional offer. While this will work for
awhile, eventually you will have difficulty
getting new offers and places to transfer the debt
to, or you'll miss the fine print on one of the
offers and end up paying more interest than you
thought, defeating the purpose of the balance
transfer.
So how can the average individual pay off their
credit card debt without bankruptcy, without
joining a credit counseling service (some credit
counseling services are very helpful, but beware
of others who charge high fees to combine your
credit card debt and end up costing you more money
than you would have paid on your own!) and without
having to get second and third jobs?
One of the best techniques for paying off credit
card debt (and other debts as well, for that
matter) is the snowball technique. In the same
way that a snowball gathers more snow and grows as
it rolls down a hill, your payments to your
creditors will grow as you pay off one debt and
then apply that payment to your next creditor.
Make a list of each of your creditors, including
their minimum monthly payment, the total amount
owed, and the interest rate you are being
charged. The debt that has the least amount owed
will be the first creditor you will concentrate on
paying off. You'll pay the minimum amount owed on
each of your accounts except for that one, sending
as much as you can to this creditor to pay it off.
For example, let's say you have three credit cards.
Credit card one has $7,000 owed at 20% interest,
and a minimum monthly payment of $80, credit card
two has $5,000 owed at 18% interest and a minimum
monthly payment of $45, and credit card three has
$2500 owed at 21% interest with a minimum monthly
payment of $30. You're going to send minimum payments
to credit card's one and two, and send as much as
you can afford to credit card three, until it is
completely paid off. Let's say you can afford to
send $100 to credit card three. Once you've paid
the account off, write the company and cancel the
account. This removes it as ”available credit” on
your credit report
and helps your credit score.
So now you have an additional $100 a month.
You'll now concentrate on credit card two, which
is now your lowest debt, now slightly less than
$5,000. The payment you'll send to credit card
two will be $145, since you had already been
sending the minimum amount of $45, and you're
adding the payment from the first card that you
paid off. The snowball has gathered more snow!
Now, once you've paid off your second credit card,
you will have an additional $145 per month to send
to your last credit card, to which you had already
been sending $80. The new payment to credit card
one is $225 per month- almost three times the
minimum amount due.
Using the snowball technique is not an overnight
solution, but you most likely didn't obtain all of
this debt in one night, either! It is an easy
method to apply, and will get you out of debt much
faster and at less interest than if you just sent
the minimum to each card every month, and works
much more effectively than trying to send an
additional few dollars to each account every
month.
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